Buy Side - Should we pay brokers and intermediaries a commission?

January 17, 2022

by an investor from Indiana University at Bloomington in Austin, TX, USA

I was chatting last week with a new acquisition entrepreneur and trying to help with his search. He asked a really great question and one that I don't know the answer to. Any insight would be great.

Given 80-90% of lower middle market deals come through business brokers and intermediaries, do buyers typically compensate those folks when they share deals. If so, what does that comp structure look like ( Is there a specific percentage or fee that's commonly paid)? Is it formal (biz dev agreement) or informal (handshake).

For clarification - this individual had been contacting multiple brokers, did not want to sign exclusively to do a search with a single broker, but had wondered if they should offer comp to brokers that bring deals they acquire.

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Reply by an intermediary
from The University of Michigan in Bonita Springs, FL, USA

For me and my firm it depends. Our firm does two levels of buy-side search. 1. If you are looking in Florida, we can automate alerts of new listings from members of our State Association as we have a co-brokering arrangement and share in the sell-side commission agreement. There is no charge. 2. If the buyer is looking outside of the State of Florida, no other state in the US has a co-brokering arrangement; therefore, we are unlikely to be paid by the sell-side for bringing a buyer to the transaction. Combined with the fact we need to invest money in mailers and time in follow-up calls, we will require a buy-side commission agreement in the event we are not permitted to share in the sell-side commissions and charge a small up-front fee for the cost and time of mailers and calls.

That said, as one of the more successful main street & lower-middle-market brokers in the U.S., I typically push buy-side agreements off to my junior team members for two reasons: First, they are very time consuming and my sell-side business can often consume###-###-#### hours/week alone. Second, buyers, as much as they say they are motivated to buy, are often difficult to please as many times the deals we find aren't represented on the sell-side and/or aren't properly prepared for sale. The hourly compensation converting the buy-side search's small up-front fee into a commission and reasonable compensation for searching, finding and often preparing a business for acquisition, has historically been substantially less than the per hour compensation I earn working a sell-side deal.

Reply by an intermediary
from Oklahoma State University in Memphis, TN, USA

We find buy-side services to be pretty complicated. We are contacted every week by multiple buyers seeking opportunities in our vertical (lawn, uh landscape, tree, vegetation management, snow removal and related service companies. While we are primarily a sell-side firm, because we are Specialists in a Relatively hot sector, we get lots of inquiries from buyers about buy-side services. We offer four services###-###-#### We offer a 45-minute consultation free of charge to any buyer, educating them about the industry and sharing our perspectives, (2) We offerr additional consulting for buyers at an hourly rate, which includes elements of strategy, target identification, negotiation, deal structure and diligence###-###-#### We have begun to offer, occasionally, a service where we match non-sell-side clients to buyers. We ask only for a buy-side success fee in these cases., We do this only rarely. (4) On even rarer occasions, we will conduct a search for a buyside client, which includes a monthly fee and a success fee.. We would only do this in a situation where it makes sense for everyone and we felt very positive about the buyer and the prospects for the project. One of the reasons we avoid it is that, in most cases, we make a better return on serving sell-side clients. We take the potential for conflict very seriously. We would never accept fees from both sides of a transaction.

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